See https://www.ft.com/content/92f86602-a7f1-11e4-be63-00144feab7de

Rise and fall of a commodities powerhouse

Phibro, the former trading house that once owned a Wall Street bank, to close after 114 years

Phibro is to be dismantled, ending a 114-year-long run for a former giant of the commodities markets that started in a Hamburg living room and became rich enough to take over a Wall Street investment bank.

The trading house’s business will be wound down in the first quarter, owner Occidental Petroleum said last week. Occidental had bought the former Philipp Brothers in 2009 from Citigroup.

The decision to close comes as crude and other commodities scrape multiyear lows. Andrew Hall, Phibro chief, is an inveterate oil bull, renowned for making huge gains on bold bets that prices will rise. “He never goes short,” Stephen Chazen, Occidental chief executive, once said.

Under Citi, Phibro was a profit engine that never suffered a losing year. But under Occidental it became a victim of listless oil markets followed by what Chris Stavros, chief financial officer, called “sharp commodity price movements” as crude plummeted to below $50 per barrel.

At its pinnacle in 1980, Phibro had $23.7bn in revenue, which ranked it the 15th largest US company at the time and was more than Occidental’s net sales last year. In 1981, it acquired Salomon Brothers, the bond trading powerhouse.

The Salomon deal generated unaccustomed headlines for the powerful company. Phibro used a combination of discretion and aggressiveness to move “beach sands from Australia to Rotterdam, copper concentrates from the Philippines to Japan, cocoa from Brazil to Germany” and some 150 other commodities from tungsten to wax on any given day, according to a company history by Helmut Waszkis.

Phibro was a template for companies such as Glencore and Vitol that today dominate the commodities trade. It was an early adopter of oil swap derivatives, said Paul Newman of the broker ICAP. It pioneered lending to producers in exchange for the right to market their output.

“They were an extremely well organised and powerful enterprise,” said David Messer, chief executive of Freepoint Commodities, a US-based trading house.

Julius Philipp started as a metal merchant in 1901 from his family’s Hamburg flat. In 1909, his brother Oscar moved to London where he founded the first company named “Philipp Brothers” at 118 Leadenhall Street. In 1914, one of Oscar’s apprentices opened an office in New York. Julius Philipp remained in Hamburg until the rise of the Nazis forced his family to move to Amsterdam. He died in the Bergen-Belsen concentration camp in 1944, according to the Waszkis company history.

He never goes short

Stephen Chazen, Occidental chief executive, said of oil bull Andrew Hall

The New York office eventually became Philipp Brothers headquarters. For decades it was run by German-Jewish immigrants who cultivated talent by hiring lehrlings, or apprentices. “A trader lives by his wits,” Ludwig Jesselson, Phibro’s longtime chief, used to say.

The inflationary 1970s were go-go years for Phibro. With access to oil from places such as Iran and Nigeria and relationships with refiners, the company increased profits more than tenfold. It helped create the petroleum spot market, where tankers change hands at a moment’s notice. “They knew twice as much as you did about anything. They knew about where any drop of oil was at any point in time,” said Michael Cosgrove, who brokered oil deals for the company.

Marc Rich, former senior figure at Phibro, left the company in 1974 and set up the foundation of Glencore

In 1979-80, when crude prices doubled following the fall of the Shah of Iran, Phibro made $1bn trading oil, said Al Kaplan, former president of Phibro’s energy unit.

“We basically controlled the oil world,” said Mr Kaplan. “It was quite amazing. We had very good people. There was no price dissemination, so we used to tell people what the price was.”

Phibro became a proving ground for senior figures in the commodities industry including the late Marc Rich, the trader and pardoned fugitive who made a stormy exit in 1974. The company Rich founded became Phibro’s bitterest rival and the foundation of Glencore.

Mr Hall joined Phibro from BP in 1982. In his bullishness he clashed with Mr Kaplan. One afternoon in the 1980s, Phibro sold millions of barrels of Brent crude in a large flurry of transactions, recalled Mr Cosgrove, the former broker. In the same phone call in which Phibro had sold the barrels, its trader suddenly said he now wanted to buy multiple cargoes instead.

Andrew Hall, Phibro chief

“Al just sold six cargoes short and went home and Andy walked in and decided to flip the book long,” the trader told a stunned Mr Cosgrove.

Commodities slumped in mid-1980s and so did Phibro’s profits. Soon Salomon executives grabbed control of the combined company and stripped Phibro from the parent’s name.

“The acquirer never knew what hit it. The acquiree dominated almost from day one. A total mismatch,” Michael Bloomberg, the former Salomon partner who became a financial technology mogul and New York mayor, wrote in a memoir.

Andrew Hall bought Derneburg Schloss, near Astenbeck in Germany

After Mr Hall took charge of Phibro’s energy unit in 1991, the company shifted away from moving physical cargoes and into trading paper derivatives. With his wealth he bought troves of contemporary art and a castle in Germany located near a settlement called Astenbeck, after which he named his $4bn hedge fund. Controversy over a potential $100m pay award to Mr Hall after Citi had been bailed out by taxpayers prompted Phibro’s sale to Occidental.

Mr Hall carries on with the hedge fund and remains a stubborn bull. In a recent letter to investors he acknowledged oil’s dive but predicted prices in the $70-$80 per barrel range over the longer term.

“There have been two constants of the oil market,” he wrote. “The first is that demand always grows. The second is that supply from existing resources always falls because of depletion.”

part 1 is here ... : https://www.jewishlinknj.com/features/21401-my-stories

I had graduated from college in June 1949, and I started at Philipp Brothers on July 5.

My first “office” consisted of a semi-automatic calculator on a small two foot by one foot adding machine stand, located in the office of the traffic manager, Mr. Fischmann. Consequently, I was always under observation and Mr. Fischmann had a habit, once in a while, when he was passing me, of throwing a question at me about the particular transaction that I was working on. He wanted to find out whether I knew and understood what I was doing or whether I was just doing it mechanically. It was a good way of keeping me on my toes, but I was exhausted by the end of the day from the strain. This lasted for some months, until, I guess, he was convinced that I would make it. My work during these months consisted strictly of calculations (preparing invoices and accountings), adding, subtracting, multiplying, dividing, percentages, decimal places etc. No higher math, but pages and pages and hours of work, just to calculate the value of all the parts of just one shipment.

PB, in those early years, was primarily a merchant dealing mostly in ores and concentrates, as well as metals and scrap. The company had its origin in Europe, mostly Germany, and had been founded by several German Jews who had come to the US with experience in metals and ores.

Philipp Brothers would, in its prime, be the world’s largest metal merchant dealing not only in metals but also many other raw materials such as sugar and oil. No, we never handled flour, otherwise we could have baked a cake.

[...]

Originally PB also had a chemicals division. In July 1936 that original company split into two parts. The chemicals division became Philipp Brothers Chemicals, headed by Siegfried Bendheim, and the metals division became Philipp Brothers Inc., headed by Siegfried Ullmann. PB Chemicals continued to exist until very recently, with its last headquarters in Fort Lee, New Jersey.

PB had started out as a private company, owned by the four senior officers. The company then changed its structure and became Philipp Brothers Ore Corporation, with a modest number of shares being made available for purchase to some senior employees. Eventually PBO merged into Minerals and Chemicals Corporation of America, a New Jersey company listed on the NYSE. This, for the first time, enabled senior officers to cash out and solved the problem of settling with estates.

Later, that entity, then known as Minerals and Chemicals Philipp Corporation, merged with Engelhard Corporation, also a New Jersey corporation. That company, headed by Mr. Engelhard, dealt primarily in precious metals, and it is said that he personally was the model for the book and movie “Goldfinger.”

When the company grew in size by leaps and bounds, management appointed officers from among the employees. I was appointed at first assistant vice president, later vice president, and subsequently, group vice president, which was one level below senior vice president.

An interesting occurrence happened in the 1960s. It involved the US Customs assessing an import duty on a Norwegian artificial Columbite, claiming it was a chemical and not a mineral. Since PB was the agent for the manufacturer Norsk Bergverk, and since the assessment of the import duty would make the importation uneconomical, we felt it our obligation to object to this assessment. Since importation and import duty was part of traffic responsibility, I was requested by management to handle it. I did a lot of home reading and talking to attorneys and finally thought I was ready for the fight. A meeting was arranged in an office of the Department of Commerce in DC. When I got there, I got a sinking feeling in my stomach since I was facing a battery of lawyers both from the Department of Commerce and the Treasury Department. They all sat on one side of the table and I, together with me and myself, sat on the other side. I presented my case and fortunately, since it was an informal rather than a court hearing, there was no need for formalities. I argued that in 1933, when Congress passed the act establishing import duties, there existed no such thing as artificial Columbite. Consequently, Congress could not have had this material in mind when establishing that the mineral Columbite was duty free. Therefore, if it cannot be classified as a chemical, it must be a mineral and be duty exempt. Lawyers call that Congressional Intent. I won and the material was declared duty free.

[...]

The company had annual management retreats to which managers from all over the world came to give reports and to discuss policy. Frequently one of these meetings would be held in Holland due to its central location. The company leased a small hotel in Schreveningen, near Amsterdam, for a few days to put everyone up. All meals were kosher and catered from Amsterdam. I attended a few of these meetings.

The company eventually split off the minerals and chemicals division, and later also the Engelhard portions, and then purchased the famous Wall Street firm of Salomon Brothers. As the company continued to grow, the Salomon portion became dominant, until, in the 1980s, the breakup of what once was the world’s largest metal trading firm began. There are many reasons and theories for this breakup, but that is the subject of a different story.

In 1982, due to the changes taking place in the conduct of the business, management decided to decentralize traffic, and to have each trader handle traffic under his own jurisdiction. With no traffic department, there was no need for a department manager anymore. I transferred to the steel trading department, where I supervised the trading activities of a new commodity for PB, namely, Oil Well Steel Drilling Pipe. During those boom years for oil drilling in the early 1980s, it had become a new section in the steel department, at the time managed by my friend Menno Ratzker. It was eventually, like so many other new PB ventures, a disaster, and when the drilling boom died out, everybody was stuck with huge inventories. But while it lasted it gave me the opportunity to learn something new, to trade for the first time and to travel to Houston many times as well as to other places in the US and to Mexico, Venezuela, Spain, France, Italy, Greece, and Romania, among others.